We've been discussing the turmoil in the financial markets for the last three weeks both literally and figuratively. We've discussed the massive flow of money headed into the short-term rates in, "Expected Turbulence in the Financial Markets." We noted the rotation from industrial to precious metals in, "Re-shuffling the Metals Markets." We've caught both sides of the equity market volatility between, "Equity Rally Waves a Caution Flag" and "Hidden Strength in the S&P 500." The final piece of the confusion was addressed timely enough in, "Bottoming Action in the Euro Currency" which we wrote the night before the Dollar turned. The point of all this review is that today's action in the copper market further reinforces the increasingly negative attitude that the commercial traders are taking towards global output. Taken in total, the signs are negative. Taken individually, they are good trading opportunities.
The action in the copper market this week has been quite noteworthy. First of all, recall that the copper market has not sold off nearly as much as the precious metals have. Secondly, the copper market bottomed in late January. This is typical seasonal timing as construction prepares for spring's thaw. In fact, commercial traders had booked the most forward copper ever just over a month ago. Things looked more or less like another normal, if not outright bullish, spring until the Fed's recent meeting showed the first hint of a new reality with declining and zero rates the expected as the protracted norm due to a sluggish global economy.
Commercial copper traders are holding a record net long position near the top of their channel. Their sudden shift to selling could seriously dampen the market given the number of contracts they need to unload.
We noted early this month in, "Copper Traders Bailing Out of Record Position," that when the copper traders decide to sell, the futures market submits as you can see in the shaded periods on the copper futures chart below.
Commercial selling created meaningful declines in 9 out of 13 observances over the past few years.
This brings us to the current situation in the copper market. The Commercial traders appear to have had their own collective concerns about the economy and their corresponding record net long position even prior to the Fed's announcement. Now, factoring their take on the Fedspeak, we can see that they've sold 20,000 contracts in the last four weeks thus, pushing their momentum firmly into negative territory.
Perhaps even more telling was the action- rally. The market rallied more than 9.5% from close. Typically, a move like this would be accompanied by growing open interest if it were to continue. This is fueled by people watching the market's decline who don't want to miss the rebound. Higher prices should draw in new money. However, looking at the volume and open interest reports from the periods' events paints a different picture. Open interest actually declined by nearly 6% on this rally or, 6,250 contracts. This also represents more than 11.5% of the record position that the commercial traders had accumulated heading into this rally.
The behaviorally similar market action in the previously mentioned markets lends credence to the "about face" the commercial traders are exhibiting in the copper futures market. Based on the success they've had in predicting downturns in their own market individually, we believe the corroborating story lines taking place in related markets reinforces the story of lower global GDP ahead. Finally, the official COT Sell Signal will signal the downturn on the chart below.
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